Christian Graus wrote:
The government does not create inflation. Even if it did, the concept of any minimum wage is meant to be a form of protection for low skilled workers from being exploited. That it's not being enforced to do that in the US is a failure of unfettered capitalism, not socialism. It's a total absence of socialism that is creating this problem.
The government can create inflation, or kill jobs. A company produces widget, and sells them for 100 dinar. 55 cover fixed costs. 20 cover materials/production overhead 20 cover labor, which is being minimum wage. 5 is profit. The factory runs at about 80% capacity. It produces 100 widgets per day, and It invested in smart machines, and can use unskilled labor. The widget demand is fairly inelastic. People spend an average of 20% of their income on widgets. Case 1, create inflation. The government comes in and doubles the minimum wage. The manufacturer has to raise the price of widgets by 10%. Now everyone spends an average of 22% of their income to get the same good. (Widgets, being such an important part of the economy, are part of the CPI.) Raising the cost of widgets has reduced income for everyone above the new MW by 2%. This has caused 2% inflation. Case 2, cost jobs Foreign widget producers use stupid machines and semiskilled labor being paid less than our MW. Most in-country widget manufacturers use smart machines, or have been driven out of business. The local widget cost about the same as foreign widgets, since the smart machines drive down labor costs. The foreign producers will not be forced to raise their labor costs. Raise price 10% and most people will buy foreign. There is still 20% capacity remaining. Using it does not increase fixed costs, only labor & material/production overhead. I could hire more people and work the plant at 100%, my output would go up to 125. There is no maintenance time built into that, which is an issue. Costs would be 55 + 1.25*(60) = 130/1.25 = 104 dinar, before profits. What is the factory owner supposed to do? He is in it for a profit, so why would he want to continue his business at a loss? He dumps his workers and attempts to sell the machines over-seas, at a loss, since it would not be financially viable for anyone else here to buy them and produce widgets. A restaurant that has to cut waitrons by 50% will end up delivering worse service. A guys runs a shop and has one employee to run the shop while he is